graphical analysis
TRANSCRIPT
GRAPHICAL ANALYSIS
Graphical Analysis
- shows and explains price and output determination
Short-run Equilibrium of a Firm Under Pure Competition
- determined by the intersection of MR and MC curves where MR = MC (or the equilibrium of the competitive firm which is also profit maximization).
Short-run equilibrium of a firm under pure competition EARNING
- this graph indicates 80 units at a price of P4 per unit as the most profitable output.
PROFIT
P4
80
Most profitable output
MR = Price
MC AC
If MR = MC and MR > AC - competitive firm
is earning pure profit
Short-run equilibrium of a firm under pure competition LOSING
-to minimize the lose the firm should produce an output where Price = MC (or MR = MC)
LOSS
MCAC
MR = Price
Least loss output
Quantity
Price
If AC > MR- competitive firm
is losing
Long-run Equilibrium of a Firm Under Pure Competition
- where MR = MC = AC = price
Long-run equilibrium position of a competitive firm
Equilibrium point
Most profitable output
MR
MCAC
Price
Quantity
MR = AC = MC = AC
Pure Monopoly
- Demand for the product of the firm is same as the market demand of product
- demand curve is down sloping- Monopolist can only increase his sales
by offering a lower unit price for its product
Table 5.2. Demand and revenue schedule of a pure monopolist.
QD PRICE TR MR
1 P 50 P 50P
2 45 90 P 40
3 40 120 30
4 35 140 20
5 30 150 10
6 25 150 0
7 20 140 - 10
D, MR, TR of an imperfect type of market structure like the monopolist.
Price
Units
TR
D
MR
- More units are sold at a lower price
- TR increases at a decreasing rate and then declines after reaching its maximum
- MR is always lower than the price
- At a lower price, additional income is lower than the previous additional income
Profit Maximizing and Loss Minimizing Positions of a Pure Monopolist
Profit maximization under the pure monopoly
Monopoly Profit
Most Profitable Output
MCAC
D (or price curve)
MC = MR
units MR
P
QO
Price > AC- Pure Monopolist
enjoys a monopoly profit because there are no competitors
Loss minimization under the pure monopoly
Loss
Least loss output
MC
AC
D (or price curve)
MC = MR
units
MRP
QO
Price < AC
Short-run Profits/Loss and Long Run Equilibrium under Monopolistic
Competition
- Demand curve is highly elastic (but not perfectly elastic) because of the presence of relatively large number of competitors selling close substitute products.
Short-run profit
Profit
MCAC
D
MR
P
QO
AC
MR
P
QO
AC
Profit
AC
D
MR
P
QO
AC
SHORT-RUN PROFIT- Maximize its
profits at an output (units) indicated by the intersection of MC and MR
- Attract more firms to enter the market
Short-run loss
MC
Loss
AC
D
MR
P
QO
AC
LONG-RUN PROFIT- Minimize its losses
at an output (units) indicated by the intersection of MC and MR
Long-run equilibrium
MC
AC
D
MR
QO
P = AC
LONG-RUN EQUILIBRIUM- Firms just earn
normal profits which is break-even
- This means TR = TC
Various Market Situations Facing a Firm Under Oligopoly
-When a firm reduces its price, the other ones also reduces their prices “PRICE WAR”
(a) The demand curve of a firm which increases its price without reaction from rivals
P
O Q
D
(b) The demand curve under non-collusive oligopoly.
P
O Q
D
P1
P2
a
D1
Q1 Q2 Q3
If the price cut (P2) is ignored by rivals, the firm can sell up to Q3. But if rivals also match the price cut, then the firm can only sell up to Q2.
(c) Price reduction
P
O Q
DP1
Q1
MR
PRICE REDUCTION from the current market price does not only twist(kink) the demand curve but also the MR curve which is a vertical twist.
(d) The equilibrium price under non-collusive oligopoly
P
O Q
D
P1
Q1 MR
MC
- The most profitable output is Q1 and remains the most profitable output.
- The most profitable price is P1. Any shift in MC within the vertical segment of MR does not change either price or output
Economic Profit
(e) Profit maximization of a firm under collusive oligopoly
P
O Q
D
P1
Q1
MR
AC
MC
Oligopolists agree together with respect to both price and production in order to gain maximum profits.